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CFDs are high-risk, complex and costly financial products. Most people lose money trading CFDs.
What is a contract for difference CFD?
A CFD is a type of derivative. Its value is based on an underlying asset, such as shares, commodities, currencies, crypto assets or market indices.
When you trade a CFD, you don't own the underlying asset. Instead, you enter into a contract with a provider and speculate on whether the asset's price will rise or fall.
Your profit or loss depends on the difference between the asset's price when the CFD is opened and when it is closed:
If you buy a CFD and the price rises, you make a profit. If the price falls, you make a loss.
If you sell a CFD and the price falls, you make a profit. If the price rises, you make a loss.
CFDs are high-risk investments and most people lose money trading them. Most people who start trading CFDs stop trading within a year.
How CFD trading works
CFDs use leverage. That means you only pay a small amount of money (called ‘margin’) to take a larger position. Learn more about borrowing to invest.
Gains and losses are based on the full value of the position – not your margin. That means a
small price change in the value of the underlying asset can have a big effect on the value of a CFD. For retail clients, losses can quickly exceed the margin used to open the position, although ASIC's product intervention measures limit losses to the amount of money held in a retail client's CFD trading account.
In Australia, CFDs are only available to trade ‘over-the-counter’ – they are not traded on a licensed exchange. This means a CFD is a contract between you and the issuer. You both agree to pay the difference in price of an underlying asset between the open and close of the contract.
A CFD contract is legally binding. If the market goes against you, the CFD issuer may:
- ask you to pay extra money at short notice to keep your CFD position open (a ‘margin call’). This may lead to further losses.
- close out your CFD, for whatever it’s worth at the time. You may lose all the money you invested.
Example: a CFD trade that goes wrong
Sophia thinks the share price of a mining company will rise, so she buys a CFD.
She only needs to put up $500 of her own money (the margin) to open a CFD position worth $10,000.
Instead of rising, the share price falls. Because her profit or loss is based on the full $10,000 position, not her $500 margin, Sophia quickly loses money.
The CFD provider asks her to pay more money to keep the position open (a margin call). Sophia can't afford to pay, so the provider closes the CFD. She loses her $500 margin and may have to pay additional fees and charges.
This example is simplified and doesn't include fees or charges.
CFD trading often incurs fees and costs, including commissions, spreads and overnight financing fees. These fees and costs can be high. They can reduce any profits you make and make your losses worse.
CFD contracts are not all the same. Every CFD issuer has their own terms and conditions. You rely on the issuer to fulfil their obligations to you.
Look for details in the product disclosure statement (PDS) and terms and conditions.
Most CFD investors lose money. ASIC research found that in 2023-24, at least 68% of retail investors lost money trading CFDs.
Generally, the more you trade, the more you lose – especially after fees.
Most retail investors stop trading CFDs within a year.
Why CFDs are high risk
Even experienced investors may struggle to understand the risks and complexities of trading CFDs.
Risks include:
Leverage can lead to large losses. CFD leverage is like trading with borrowed money. The deposit (or ‘margin’) you give to the CFD issuer is only a small part of your investment exposure.
Leveraging and trading on margin is high risk. A small price change against your CFD position can have a big effect on your trading returns or losses.
For example, you may put up $5,000 (5%) for a $100,000 position. If the underlying asset moves against you by 5%, you could lose your entire $5,000.
Pricing risk. CFDs are traded over the counter, not on a licensed exchange. This means you enter into the contract directly with the CFD issuer. The issuer determines the prices available on its trading platform and the terms for opening and closing your position.
The price shown when you place an order may not be the price you receive. This can happen when markets move quickly or there is not enough trading activity.
Counterparty risk. Because CFDs are not traded on a licensed exchange, you also rely on the CFD issuer to meet its obligations to you. This is known as counterparty risk. CFD issuers operating in Australia must hold an Australian financial services licence and meet requirements for financial resources, risk management and handling client money. These requirements reduce risk, but they do not eliminate it. You may still lose money if the issuer fails or becomes insolvent.
Consumer protection may not apply with overseas CFD providers. CFD issuers operating in Australia must have an Australian financial services (AFS) licence.
Overseas CFD providers often don’t hold an AFS licence, so consumer protections available under Australian laws will not apply.
This means you will not have access to independent dispute resolution through the Australian Financial Complaints Authority (AFCA). If something goes wrong, you may not be able to get help.
Before you trade CFDs, check the provider has an AFS licence on ASIC’s Professional Registers Search. If they don’t have one, don’t deal with them.
If the overseas provider does not hold an AFS licence, it could be a scam.
Wholesale clients lose consumer protections
Some CFD issuers may try to offer you a ‘pro account’.
This means you might be classified as a wholesale client, taking away many consumer protections that you would have as a retail client.
If you are a wholesale client, you:
- can lose more than you invest, as you may not have ‘negative balance protection’ or ‘margin close-out protection’ on your CFD. This means you can end up owing money to the CFD provider.
- generally cannot access external dispute resolution through AFCA
- may not receive a product disclosure statement (PDS) or Financial Services Guide (FSG) for the CFD
- will not be assessed to see if you fit the licensee’s target market
Before you open an account, check how you will be classified.
CFD sale restrictions
There are restrictions on the sale of CFDs to retail investors in Australia.
CFD issuers must:
- apply ‘margin close-out protection’, which requires one or more CFD positions to be closed before losses exceed prescribed levels
- limit retail client losses by providing ‘negative balance protection’, so you can never lose more than the amount of money in your CFD trading account.
CFD issuers must not:
- exceed specific leverage ratio limits, depending on the CFD asset class
- offer incentives to trade CFDs, such as trading credits and rebates, or ‘free’ gifts like iPads
Read more about ASIC’s CFD Product Intervention Order.
Check if you understand CFD risks
CFDs are often promoted in an attractive way and can seem appealing. Before you trade, ask yourself:
- Do I understand how CFDs work, and am I comfortable with taking that level of risk?
- Am I willing and able to lose my entire investment?
- Do I know what the fees and costs are to trade CFDs? How will this affect my potential losses or profits?
- Do I really have the time to be monitoring my positions regularly?
- Does the CFD provider have an Australian financial services (AFS) licence?
- Should I really be trusting the opinion of the person trying to sell me a CFD?
- Am I making a logical decision with my money, or is this just investment hype?
Finding the right investments can be challenging. It’s important to consider your investing timeframe and risk tolerance. Learn more about developing an investment plan, and how to seek financial advice.
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